The Arab Spring, History, and Political Economy

Submitted by James Bond
On Wed, 03/30/2011

People in Maghreb and Mashreq countries, long used to being muzzled by their authoritarian regimes, are rising up to make their voices heard. This movement — if one can call it that — started first in Tunisia with the self-immolation of an unemployed street vendor. This desperate act by Mohamed Bouazizi, a poor 26 year-old university graduate without a steady job to support his family, brought out into the open the seething resentment of ordinary Tunisians at the 23 year rule of President Ben Ali.

Tunisia, despite a solid middle class, suffers from the region’s lack of job prospects for the young, crony capitalism of people close to power, and rural poverty. This spark of protest spread to Egypt, leading to the downfall of President Mubarak’s 30-year regime; to Libya, now in the midst of a bloody civil war; to Bahrain, Yemen, Syria, and Algeria. The monarchies of Saudi Arabia and Morocco announced moves to placate the citizens of those countries to forestall possible unrest. We are experiencing the Arab Spring.

Many commentators have sought what lessons history can bring to explain what the Middle East and North Africa are currently experiencing, and how it all might end. Is the domino movement sweeping the region analogous to the collapse of communism following the fall of the Berlin Wall? Or perhaps more like the end of the colonial era following the Second World War, with a time scale compressed because of modern communication technologies? These are interesting questions. It’s certainly too early to tell, but in all likelihood what we’re seeing will be a protracted process, and one that may look like no other recent economic and social transformations.

Another important question, however, is: “What can the Arab Spring teach us about political economy?” Specifically, what can the Middle East and North African process teach us about political risk; about the political economy of social transformation; and about the management of risk for private investors in countries undergoing such transformations.

The first, most obvious, lesson is that past stability is not a good predictor of future calm. On a business development trip to visit investors in Egypt last year, I was assured that there was no risk because President Mubarak had been in power for 30 years and in any case his son was being groomed to succeed him. In retrospect this now seems ironic.

Second, current turmoil could portend an improvement in the business environment in the future, particularly if the previous crony capitalist system based on access to power is replaced by a more open economic system based on competitive advantage. This would be good for investors, for consumers, and for the economy. So there may be future opportunities in today’s turmoil.

Third, the future is inherently uncertain; investors need to build risk mitigation even for almost unforeseeable events into their investment plans. Political risk insurance, which MIGA provides, is one tool for this. Other strategies involve maintaining an arms-length relationship to politically exposed persons; avoiding corruption and side payments no matter how difficult they are to resist; and perhaps most importantly, seeing opportunity as well as risk in any major change to the status quo.